Protection of Investments Act – A balancing Act between policies and investments

April 25th, 2016


By Amy Farish

On 3 November 2015 the Protection of Investment Act 22 of 2015 was passed in Parliament (the Act) despite staunch opposition. It is not difficult to understand why there has been opposition to the Act.


On 1 November 2013 the first Promotion and Protection of Investment Bill (the first Bill) was introduced in South Africa (SA). It is thought that the introduction of the first Bill was prompted by the case of Piero Foresti, Laura de Carli and Others v The Republic of South Africa ICSID case no ARB(AF)/07/1, which led the government to review its investment laws and regulations. The concern arose as foreign investors challenged the South African policy of Black Economic Empowerment (BEE) in an international arbitration. This international arbitration was presided over by two American nationals and one British national acting as head of the arbitral proceedings, all of whom did not have intimate knowledge of SA’s history and policies. This was seen as a threat as the government was concerned that certain South African governmental policies, in this case the BEE system, would not be protected through the international arbitration dispute resolution mechanism.

Along with the introduction of the first Bill came the termination of Bilateral Investment Treaties (BITs) between SA and various countries, which had previously governed their investment regimes. The introduction of the first Bill, the termination of the BITs and the backlash that followed led to a revised Bill being introduced on 22 July 2015. The Act, however, does little to allay the concerns of investors.

The expropriation clause

The first Bill contained a clause that limited the meaning of expropriation to such a degree that in certain circumstances relief would be excluded even though constructive expropriation had taken place. The first Bill stated that if expropriation took place, the matter would be dealt with in accordance with the Constitution. This meant that market value would not be provided as compensation, but rather an amount that is ‘just and equitable’ taking various factors into account.

This was the first proverbial ‘nail in the coffin’ as investors were wary that assets would be expropriated and they would receive less than market value as compensation. However, the first Bill went a step further to state that certain acts did not amount to expropriation, meaning that the protection of the Constitution and just and equitable compensation was not guaranteed.

The Act has done away with the expropriation section, yet still retains that the government may take any measures, in accordance with the Constitution and legislation, to redress historical inequalities, uphold the values and principles of the Constitution, promote cultural heritage, foster economic development and protect the environment. Whether this includes expropriation has yet to be seen but the phrasing of the section suggests that expropriation may still occur. Critics have argued that this section is too vague in its current form and it may be faced with a constitutional challenge in the future.

International arbitration

The first Bill did not provide for international arbitration, which led to an outcry among the foreign investment community. The Act has attempted to downplay concerns by stating that international arbitration may be resorted to, but only if the arbitration is consented to by government, after domestic remedies have been exhausted. The provision of this limited recourse to international arbitration has been labelled a ‘retrogressive step’ as access to international arbitration provides security to investors. For an international investor there is uncertainty as to the efficient and proper functioning of the courts in SA and the skills and expertise of potential mediators and arbitrators, leading them to query whether disputes will be dealt with in a proper manner.

Furthermore, the court, arbitrator or mediator will be South African and, therefore, there is the suspicion that South African interests will be placed ahead of those of international investors. Dr Rob Davies, the Minister of Trade and Industry, and a strong supporter of the Act, states that doing away with international arbitration will better protect South African investors and the economy. It will be easier to predict the outcome of a dispute as South African courts will have, most likely, dealt with the same or very similar situations domestically and pronounced on such situations. This will lead to certainty within the dispute-resolution setting. However, critics are concerned that, with so many factors detracting from investment in SA, the lack of international arbitration may add to these factors.

Equal treatment of foreign investors

The previous BITs operated on the basis of an agreement between the parties and the parties were, therefore, treated equally within the investment relationship. The first Bill and the Act make an attempt to comfort foreign investors by providing they will ‘not be treated less favourably than South African investors’. This would prove comforting if the drafters had not gone on to qualify this statement significantly with the words ‘in like circumstances’. This section is much the same in the first Bill and in the Act and explains that in determining ‘like circumstances’ one takes into account various factors including the –

‘(a) effect of foreign investment in the Republic, and the cumulative effects of all investments;

(b) sector that the foreign investments are in;

(e) effect on third persons and the local community;

(g) direct and indirect effect on the environment’.

This is the South African government taking into account South African circumstances, leaving little room for foreign investors’ interests.

The investment security provision also states that the foreign investor will get the same level of security as the domestic investor but that this is subject to the state’s available resources and capacity.

The unilateral nature of the Act

The Act empowers the Minister of Trade and Industry by notice in the Government Gazette to make any regulations regarding the criteria for the appointment of a mediator, process and procedure relating to dispute resolution mechanisms, any matter prescribed in terms of the Act and any other matter, which is necessary to achieve the purposes of the Act.

It is clear from this section that the Minister holds the power unilaterally to alter the investment relationship. This could deter foreign investors from becoming involved in an investment arrangement, which circumstances could change without their input or without their protests being taken into consideration. This is a drastic change from the previous regime, which was, as is obvious from its name, bilateral. Previously, the parties had to agree to any amendment to their investment relationship with each country holding equal, or as close to equal, bargaining power. Of course this equal bargaining power is often considered a fallacy, but at least the sentiment was there.

Support for the Act

The question arises as to whether these concerns are legitimate. Will the Act actually cause any significant difference to the investment climate of SA? It is argued that the main concern for investors is the return on their investments and whether they have access to an effective legal system. Over the years, SA has fared well on both counts and, therefore, international investors’ concerns may be alleviated.

Furthermore, the minister notes that after the first Bill was introduced, with all of its apparent flaws, and the termination of several BITs, a German motor company, invested R 3 billion even though they were aware of the first Bill and its potential effect going forward. Germany was one of the countries with which SA had terminated its BIT.

The majority of the BITs were entered into before the Constitution came into effect and, therefore, did not adequately protect the interests and values propounded in the Constitution. It is argued that some form of investment governance was needed in order adequately to take into account the Constitution.

On the question of arbitration, it is often stated that international arbitration is not considered to be suitable for developing countries. An international arbitrator may not adequately appreciate the difference in concerns between the investors based on the country in which they are investing, and where the investor comes from. It could lead to the one party being severely prejudiced. The Act takes this into account in the South African context and has put SA’s interests first and foremost.

Furthermore, it is argued that the Act is in line with international practice where countries are terminating BITs and introducing legislation to deal with investments internally within their countries.

The current reality

It is currently too early to determine what long-term effect the Act will have on investment in SA. However, there have been cautious remarks made by international investors regarding the Act. Notably, the European Union’s Regional Chamber of Commerce and Industry has stated that foreigners are hesitant to invest in SA at present for fear that there will be a lack of protection over their investment. This has led investors to look elsewhere in Africa and abroad.

Locally, there have been alarm bells ringing as many South African companies rely on foreign investments for their continuation. An example of such a company is Anglo-American SA, where representatives have stated that it is necessary for there to be an improvement in SA’s investment policies and the Act is not such an improvement. There are fears that the Act will drive out investment to the detriment of a large number of companies whose compromised generation of wealth may have a negative impact on the SA economy.

The European Union’s Regional Chamber of Commerce and Industry furthermore stated that the withdrawal of the BITs does not reflect well on SA. It sets the scene of a developing country struggling for power and wanting to dominate foreign investors, rather than an attitude of wanting to work together for the benefit of both parties. The termination of the BITs has also made it more expensive to do business in SA as a greater insurance premium attaches to investments made in countries where there is a lack of a BIT.


It is clear that there are many concerns with the Act in its current form. The government is placing SA’s interests and policies first to the detriment of foreign investors. This is good in principle but it is doubtful whether SA is in a strong enough bargaining position at present to be alienating investors. Although the proponents of the Act argue that the Act is in keeping with international trends, the two countries that they offer as examples, Australia and Canada (that have terminated treaties and regulated investments internally) are countries with vastly different economic environments compared to SA.

It is necessary for SA to strike a balance between protecting its own policies and encouraging investment at the same time. The Act has not achieved this balance and only time will tell whether the Act will have a negative effect on the investment environment of SA going forward.

Amy Farish BA LLB (UCT) is a candidate attorney at Hayes Inc in Cape Town.

This article was first published in De Rebus in 2016 (May) DR 26.